Ecuador to World: Pay Us $3.5 Billion to Not Drill Oil

Two years ago, we were given a lesson on how the price of oil correlates with risk. The cost of a barrel of oil also depends on demand, the quality of crude, and the temperament of the market. Whatever your take is on fossil fuels, the vagaries that affect the giant yo-yo of oil prices is fascinating. One country, however, is turning the assumptions over the price of oil on its head.

Ecuador has told the world to put a price on oil that will never hit the market. Yesterday the small South American nation signed a deal with the United Nations Development Program that leaves a huge amount of oil reserves untouched in exchange for the approximate sum of US$3.5 billion.

Under Yasuni National Park lies about 850 billion barrels of crude oil. Smack in the middle of the Ecuadorian Amazon, the park ranks among the most bio-diverse regions on the planet. Among the countless species of plants, animals, birds, and insects are two tribes who are among the few peoples still not in contact with the modern world. What does Ecuador receive in return? A windfall from wealthy countries, led by Germany and Spain, that will go towards renewable energy programs, environmental and social development projects, and eco-tourism.

The deal is a notable victory for Ecuador, which has tangled with Chevron for years over the company’s operations in the Amazon, and has moved toward eliminating fossil fuels in the Galapagos Islands by 2015. The fact that Ecuador could even get this agreement inked is also impressive because its populist president, Rafael Correa, has threatened to nationalize the oil industry. His administration insists that oil agreements switch from production-sharing deals, which North American and European energy companies prefer, to less lucrative service contracts that only give companies a flat fee for a company’s operations.

Correa is following the path of Venezuela’s Hugo Chavez, who ripped up oil production contracts, giving his government a greater share of oil production profits. Venezuela, however, benefits from huge reserves and can use them as leverage when negotiating with companies that need the fuel for its energy-thirsty customers. Ecuador’s production, in contrast, is miniscule: its daily production is only 1%, but those revenues are desperately needed: one of the country’s largest sources of revenue is the estimated US$1.7 billion in remittances sent from its people who live abroad.

This is not yet a done deal. Ecuador’s government has stated that if US$100 million of the promised amount does not arrive by December 2011, the agreement could be nixed, the contributions, returned, and then the country can decide what to do with Yasuni.

Is this a small country standing up to years of pollution by foreign firms? Or is Ecuador blackmailing wealthy countries to compensate for years of what some say is mismanagement? Will Yasuni become a model for other countries who feel pressured to exploit their resources? Perhaps the argument for “post-oil” economies just got a boost. Other countries balancing oil reserves and pristine swaths of land are watching.